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- I believe that technology’s disruption of the financial services industry is still in its early stages and the opportunity is likely to prove massive and enduring.
- Currently, I find the most interesting ideas within payments, the digitization of financial services, and technology infrastructure.
- My opportunity set is diverse, going beyond innovators to include companies that harness new technologies to increase their competitive advantage and sustain strong growth.
We believe our GIAs — specialist stock pickers for whom industry research is a career path — are one of Wellington’s key differentiators. Their role is to use fundamental analysis to identify investment opportunities for clients’ portfolios. It is our belief that stock selection based on in-depth knowledge of an industry has the potential to generate strong investment performance over the long term.
INTRODUCING OUR ANALYST
HOW DID YOU BECOME A FINTECH PORTFOLIO MANAGER?
Happenstance has played a large role in my career progression. I started out as a liberal arts major and became a fintech analyst privileged to participate in the birth of this industry.
After studying political science at Cornell University, I got a job on Wall Street as a health care services/biotech analyst. There I learned how to analyze business models and value complex organizations. Although I enjoyed the work and gained invaluable insights from one of the most innovative industries on the planet, I realized biotech wasn’t my passion — and that, to succeed in finance, I needed to add further skills to my toolkit.
So I did an MBA at the Wharton School at the University of Pennsylvania, where I refined my investment acumen and developed a passion for technology. While at Wharton, I was fortunate enough to land a summer internship at Wellington in the technology group. The learning curve was steep and I dedicated eight weeks to covering a software testing company. By the end of that summer, I was the firm’s expert on this burgeoning niche industry and was asked to join the firm and focus on the tech sector, specializing in professional services and transaction processors.
What I enjoy the most about the industry is the complexity of understanding new companies and evaluating business models and markets, as well as the collaboration that is key to doing this quickly and well. I also enjoy studying the disruptive aspects of technology in the financial industry, which I inadvertently research every time I shop. Some of these developments are fundamentally altering the way we live our lives, and I believe fintech is going to meaningfully change the embedded banking model and the way consumers access financial products over the next decade.
Covering the fintech industry from its beginning has given me a perspective many others don’t have. For example, I have a greater appreciation for the differences between modern technologies and business models versus legacy systems. I feel that having a historical perspective gives me an edge when evaluating who the winners and losers will be in the next generation.
INDUSTRY OF FOCUS: FINTECH
IN RECENT YEARS, THERE HAS BEEN A LOT OF INVESTOR INTEREST IN FINTECH. IS IT TOO LATE TO GET INTO THE SECTOR?
In our view, we are still in the early stages of disruption in financial services, with data analytics, cloud computing, and machine learning only just starting to be broadly applied across the sector. In industries like music and retail, the dominant new disruptors took huge market share in just a few years, causing rapid declines for many incumbents. But change in the financial sector is likely to be gradual and last a long time. That is partly because people tend to be conservative with their money: Even those who say they don’t like their bank rarely switch to a competitor. This inertia makes customer acquisition harder for new entrants to the industry, reinforcing our belief that this is a multidecade opportunity. The impact of regulation and the complexity it creates for new entrants also cannot be overstated.
In addition, we don’t think that fintech will be a winner-takes-all environment. The industry is too complex, too heavily regulated, and varies significantly by region and subsector. As a result, we expect to see multiple leaders in markets around the world.
HOW BIG DO YOU THINK THE OPPORTUNITY IS?
We are super excited, because we believe the opportunity is huge and will prove enduring. Our estimate is that companies with a combined market capitalization of US$8 trillion in the banking sector and US$16 trillion in broad financial services are set for disruption. In addition, around two billion people globally are currently without banking services.1 Think about the future opportunity there.
For investors, the universe for potential fintech investments is massive, having grown to around US$3 trillion in market cap over the past few years.2 Since 2005, almost 170 fintech firms have gone public, raising over US$67 billion,3 and the pipeline of initial public offerings remains very strong. Further, I find plenty of stocks that give sufficiently pure exposure to fintech.
WHERE ARE YOU FINDING THE MOST INTERESTING IDEAS AT PRESENT?
I see payments as the largest segment of the overall opportunity. According to company filings, the two leading global payments companies have grown volumes at a compound annual growth rate of around 11% per annum for the past 15 years,4 yet 75% of global consumption is still transacted in cash.5 Overall, we expect global digital payment volumes to keep growing steadily long into the future, as the shift to card payments compounds the growth in personal consumption expenditure (Figure 1).
Today, 80% of global commerce is still done in physical retail stores, according to data from Visa. By definition, every transaction that shifts to e-commerce is paid for digitally. We forecast that e-commerce will grow at 15% – 20% per annum for the next several years, providing a strong tailwind for companies in the subsector.
These trends are relevant in every market around the world, but the financial infrastructure of each country ― and therefore the payment infrastructure ― has evolved differently from the US to China to Brazil. So it’s important to understand these ecosystems at the country level to take advantage of the different opportunities in each market.
WHAT OTHER SUBSECTORS LOOK COMPELLING?
We believe the digitization of processes that used to be done manually by humans offers a growing opportunity set in financial services. The shift to digital makes these processes cheaper and often results in better end-customer experiences. Despite the obvious superiority of these new models, customer connectivity takes a long time to develop, because of the trust you need to build in a new financial relationship. Once these businesses reach scale, they tend to be highly profitable and sticky, so we look to identify the winners early and own them for a long time.
In addition, we find technology infrastructure compelling. Bank infrastructure is old ― most systems were developed over 30 years ago. Banks with outdated systems find it hard to compete with new entrants. In the US and other big markets like Western Europe, banks have had to spend tens of billions of dollars on technology and processes since the global financial crisis, but only to satisfy regulators and clean up their back offices. We are now at an exciting tipping point where banks around the world are about to redeploy that spending to support growth, as they want to compete with new fintech entrants in their markets. This will help some of the banks, but these funds will also flow to the firms that are providing the technology the banks need to thrive.
It’s a different story in developing markets like China and India, which are unencumbered by existing infrastructure. There, they have a blank sheet of paper to design their infrastructure, and many financial institutions are using the cloud to process transactions and share data. The providers of these cloud-based services take a cut each time the banks use their technology.
WHAT DO YOU SEE AS THE MAIN RISKS IN THIS INDUSTRY?
The dispersion in performance between growth and value stocks has been wide, with growth broadly outperforming value since the global financial crisis. That trend may be due for a reversal, and fintech stocks clearly fall in the growth category. Nevertheless, we think these companies should benefit from a strong secular fundamental tailwind over the long term.
Within financials, regulatory risks are always a concern, but most developed markets have been through a decade of regulatory tightening, and the appetite for further regulation appears low. Many of these companies are also data rich, which entails data privacy risks. However, we have seen evidence lately that investors now understand that data breaches have to be accepted as a fact of twenty-first century life.
HOW DIVERSE ARE THE COMPANIES YOU INVEST IN?
The majority of companies we find interesting today are listed in North America, but their revenues are geographically diverse. We expect the opportunity set outside North America to grow as the industry continues to develop over time. Our approach spans the market-cap spectrum, but we believe that mid-cap stocks will be the sweet spot for many opportunities.
And the business models are similarly diverse. Many companies are not themselves technological innovators. In our view, the most attractive investments are often companies that harness new technologies to advance their competitive advantage, build deep barriers to entry, and sustain above-market growth rates over the long term. For example, credit bureaus are a traditional industry where some incumbents have embraced new technology and thus become a much more attractive investment. They have extensive proprietary data, and they have applied new analytics and machine-learning methodologies to the data while at the same time re-platforming their IT infrastructure to deliver faster innovation. This has accelerated their growth, and we think the industry will be less cyclical in the future because of these investments.
1World Bank, Global Findex Database 2017. Wellington Estimates. | 2Based on Wellington Management estimates of companies with 80% of revenues coming from fintech sources. As of 31 March 2020. | 3FT Partners, CEO Monthly Market Update & Analysis, April 2020. | 4Visa and Mastercard. | 5Wellington estimates, 31 December 2019.